China Macro Update: Banks to Win

As the outlook for Chinese assets improves, we see tactical opportunities in H-share listed banks amid a potential re-rating of Chinese markets. The growing momentum behind China’s economic recovery, coupled with a more favorable external environment (RMB strengthening vs. USD), reinforcing the case for selective reallocation into Chinese equities.

Macro developments in 2025 have delivered a mix of constructive surprises and pockets of volatility. On the cyclical front, trends have largely aligned with macro consensus: the real estate sector continues to show signs of bottoming out, and domestic demand (particularly household consumption) is staging a gradual recovery. However, what exceeded expectations is the accelerated realization of productivity gains across industries. This has been driven by internal cost optimization, aided by the dissipation of price pressures stemming from earlier demand weakness.

High-tech companies driven by domestic version of ChatGPT (known as DeepSeek) have rekindled global investor interest in China’s "Industrialization 4.0" agenda. Early signs of a rebound in private sector capital expenditure suggest that corporate confidence is cautiously returning, supported by continued fiscal accommodation and strategic policy initiatives. Looking a few quarters ahead, we anticipate China’s rebalancing between domestic and external demand to reshape the country’s growth model. Simultaneously, a global shift away from concentrated exposure to U.S. dollar-denominated assets may act as a catalyst for repricing Chinese assets, especially if current account surpluses are increasingly converted into RMB holdings.